Noguera, José and Pecchenino, Rowena A.
Can a Cartel Fuel the Engine
of Economic Development?
CERGE-EI Working Papers (280).
OPEC’s stated mission is to promote the economic development and growth of its
member states while minimizing volatility in the oil markets. But after a promising
beginning many member states’ economies have declined rather than prospered—a
clear indication of OPEC’s failure to meet their development goals. Thus, we ask if a
resource cartel can achieve the joint goals of development and resource market
stability. In a model in which oil producing countries choose whether to join an oil
cartel or remain in the fringe, we find that, in a highly elastic oil market, a profit
maximizing cartel is inconsistent with oil market stability in the face of demand shocks.
Thus, it is inimical to macroeconomic stability, an essential requirement for long-lasting
capital investment, and therefore economic development and growth. Consequently, it
may not be optimal for an oil-exporting country that cares adequately about
macroeconomic stability to join the cartel. But for a country where short-run
considerations overwhelm long-run concerns, cartel membership may be the correct
choice. Yet the oil rich are ultimately cursed by their excessive reliance on their
resource wealth—current profligacy begets future decline.
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